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As we near the close of the year, it’s a great time to focus on maximizing tax-saving opportunities. If you’re a business owner, high earner, or retiree, taking advantage of these strategies before December 31 can help lower your 2024 tax bill. Here are ten effective ways to reduce taxable income and capital gains, from EFS Advisors.

1. Optimize Your Investment Income

For those with taxable investment accounts, where gains are taxed annually, placing income-producing assets like bonds in retirement accounts can yield significant tax savings. Tax-exempt municipal bonds, tax-efficient funds, and U.S. Treasurys, which are exempt from state and local taxes, are especially beneficial. Allocating investments across taxable and tax-deferred accounts with tax efficiency in mind can help optimize your portfolio’s growth and reduce tax impact.

2. Max Out Employer-Sponsored Retirement Plans

If you have a 401(k) or 403(b) at work, maxing out contributions can lower your taxable income. In 2024, the contribution limit is $23,000, with an additional $7,500 catch-up for those over 50. Workers can also explore the “mega backdoor Roth” strategy to convert funds to a Roth IRA, where they grow tax-free, enhancing retirement flexibility.

3. Consider a Tax-Deductible IRA Contribution

Depending on income and access to employer retirement plans, some taxpayers can make pre-tax IRA contributions. For 2024, those within income thresholds can deduct up to $7,000 (or $8,000 for those 50+). Remember, non-deductible IRA contributions may lead to double taxation, so consult a tax advisor before proceeding with those.

4. Plan Retirement Withdrawals Around Tax Rates

If you’re approaching retirement, consider how your withdrawals will affect your tax bracket. With Roth conversions and targeted withdrawals, retirees can fill lower tax brackets strategically. This approach also allows for utilizing the 0% long-term capital gains rate, available for married couples with income up to $94,050 in 2024.

5. Strategize for Stock Options and Equity Compensation

For those with stock options or restricted stock units (RSUs), there are complex tax implications, including potential alternative minimum tax (AMT). Exercising incentive stock options at optimal times, or even filing an 83(b) election for restricted stock, can minimize tax burdens and capitalize on favorable capital gains rates down the road.

6. Donate Appreciated Stock Using a Donor-Advised Fund

If you hold appreciated assets in a non-retirement account and have charitable intentions, donating these to a donor-advised fund can provide a significant tax deduction. Donors receive a deduction for the market value of the asset and avoid capital gains on the sale, allowing for larger contributions to the causes they care about.

7. Harvest Losses in Taxable Accounts

To offset taxable gains, consider selling underperforming investments at a loss to harvest tax benefits. Losses can offset capital gains, with up to $3,000 of net loss deductible against other income annually. Be cautious of the wash-sale rule, which limits tax benefits when buying back the same security within 30 days.

8. Manage Distributions from Inherited IRAs

Since 2020, most beneficiaries must fully distribute inherited retirement accounts within ten years, rather than stretching them over a lifetime. Planning distributions to take advantage of lower tax years can help avoid large tax bills when distributions are required.

9. Leverage Retirement Plans to Reduce Business Income

Business owners can significantly reduce taxable income by contributing to retirement plans, such as SEP IRAs or Solo 401(k)s. In 2024, the contribution limit for these plans is $69,000, with an extra $7,500 catch-up contribution available. For high earners, this tax reduction is valuable in managing business income.

10. Donate Your Required Minimum Distribution (RMD) to Charity

If you’re over 70 ½ and subject to RMDs, consider a Qualified Charitable Distribution (QCD), where you can donate your RMD directly to a charity. This strategy allows you to avoid paying income tax on your RMD, providing a tax-efficient way to support charitable causes while meeting your RMD requirements.

More Tax-Saving Options to Explore

There are many other ways to reduce taxable income, such as estate planning, state income tax planning, non-qualified deferred compensation, and contributing to health savings accounts. Each tax-saving strategy can be tailored to individual goals, making it essential to work with a tax professional and financial advisor to choose the best approach.

The team at EFS Advisors is here to help you make the most of tax planning this year. Reach out today to discuss these options and build a tax-efficient plan for the 2024 tax season.